How do I divide equity for new co-founder and future key employees?

John Sturdivant CEO, Founder at WorkforceAlpha

May 14th, 2016

What are some principles about sizing up the equity to give a co-founder joining during prototype testing (no salary)? How much should I set aside for future key employees to hire over the next 6-12 months?

For context: I am the sole employee and 90% owner in an early-stage SaaS startup about to begin prototype testing. We have cash from an F&F round and a few customers in the pipeline.

Thanks!

Reuven Granot Corporate Strategic and Scientific Officer at Perlis Ltd

May 14th, 2016

I was in a similar situation. First I thought that employees for shares should be treated as partners, but when they did not performed what were assumed to success, I understood that this way may bring me to a company with many partners and no products. I adapted the ideas from Slicing the Pie http://slicingpie.com/book/ by Mike Moyer. I "payed" shares by successfully achieved milestones.

To make all seal good, in my opinion these milestones have to a priory been agreed.

Jake Diner Founder and CEO at Elafris

May 14th, 2016

when you are dividing equity make sure you are transparent and upfront, the last thing you want is for an early key employe to hold a grudge. you accomplish this by talking through your logic of the split. This site has helped me in a few startups to get a buy-in from all members of the early founding team. *http://foundrs.com/ * Good luck

Anonymous

May 14th, 2016

I am struggling with the same question, so went on Quora and found Mike Moyer's answer to Sam McAfee question. It's good!

Avrum Mayman Innovator, Entrepreneur, Product Visionary

May 14th, 2016

I went through this as well. I found some good websites (although I can't remember what they were. Google some) that had equity calculators that asked a lot of questions such as: who is investing their money? who, if they left, could not be easily replaced? Who is selling? etc. These calculators really helped get me to a ballpark range that was rational/defensible. Then the next step was to figure out when to vest the shares. In my case, we set a milestone of taking our product live, at which point they received a decent chunk of their total equity. The remainder vested over 3 years after launch, if they remained with the company in a full time role.

Sam McAfee Business model innovation and digital transformation

May 14th, 2016

I second @Reuven. I asked this question (or similar) on Quora, and Mike Moyer answered with a really fantastic detailed answer. This is the fourth time this week I have seen reference to Slicing Pie. I'd go with that. ;-)

Martin Omansky Independent Venture Capital & Private Equity Professional

May 14th, 2016

No formula. Lots of opinions. Your "co-founder" is not that. He/she is a contributor - even a valuable one - so treat that person as an early-on employee. award that person options to purchase 10% of the stock, vested over three years. No need to "set aside" equity for future employees. Usually the option pool for employees is about 15% of the equity, but this is voted on by the Board of Directors later in the life of the company. Subsequent investors will understand how to factor for the dilution represented by the pool. By your questions, I assume that you could be edit from legal (securities) and tax counsel. Pay their fees. You will thank them in the end. Sent from my iPhone

Frank Traylor Cofounder at Terra Health Care Labs

May 14th, 2016

Hi John,

My first suggestion: look further into the future.

In the case of the co-founder, if he/she will play an important role taking the product to market, wooing investors, keeping the team motivated, through the life of the company, that's a co-founder. If this is an important person in product development but isn't a foundational member of the company then it's a key early employee. You can call that person whatever you want but it'll make a difference in equity awards.

In the case of the the other employees, don't just look at key employees over the next 6-12 months, imagine success over the next 2-3 years. Let's say you'll be at 40 employees in 3 years; create a plan that awards your dev staff, sales staff, managers, etc. Have this approved by the board. This might change but I often see companies getting squeezed in equity awards because there wasn't proper planning and early awards were too large.

Consider your dilution through the funding rounds. You need to determine your stance on ownership. What's your tolerance for dilution.

Here are some resources for you:

A startup equity calculator that will provide some good questions to ask yourself: http://foundrs.com/

Spreadsheet for calculating founder split (link at bottom of this) http://al.bsharah.com/co-founders-its-time-to-split-that-equity/

Dilution tool that may help you look to the future cap structure: https://smartasset.com/infographic/startup

I've seen a number of startups in your situation and it wouldn't be far off to have an employee pool of 15%, two co-founders at 10% each, and you at 65%. Yours will of course vary from this but just to get you in the wheelhouse. Of course, all should follow a vesting schedule, typically 4 yrs, 1 yr cliff, limited exercise period upon departure from company.

John Sturdivant CEO, Founder at WorkforceAlpha

May 14th, 2016

Thanks all - I read Slicing The Pie and it was exactly the kind of answer I feel good about! Appreciate the recommendation and all the comments!

Matt Bradley CEO

May 14th, 2016

If you do not have any investors yet, I would consider a larger option pool (of perhaps 30%) and create an option plan for any employees that you hire. If you have a product to begin testing, it is arguable that your company has some value now (assuming that there will not be a huge pivot), and that you can give people smaller chunks of equity than would a fresh startup with just an idea. That said, given how early the company is currently, you will still want to grow a team of key players, and that will cost equity. It is worth the expense - you have to remember that 90% of $0 is still $0. Also, teams have been proven to succeed much better than lone entrepreneurs. So, compensate your early key players very very well.

That said, I would echo other comments that ensuring that people you bring on board earn equity over time (and give yourself some time to evaluate effort, fit, contribution, etc). Do a four year vesting with one year cliff (and then 1/36 thereafter), and make sure that there is a buyback clause in an at-will employment agreement.

Barbara Wainwright Get Certified with LifeCoachTrainingOnline.com and Join over 6,000 Coaches Worldwide LION

May 14th, 2016

Absolutely agree. Slicing the Pie is what I'd recommend - it is ethical, and grounded in solid principles.

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